Short sales: A solution for troubled properties

Brian Boyd CORRESPONDENT

Published Sunday March 31, 2013 at 6:00 am

PHOTO/ (T&G Staff/TOM RETTIG)

From left, Chad Rivard, founder of Rivard Real Estate & Management, and Russ Haims, owner of Hampton Properties LLC, stand outside 919 Main St. in Worcester. The property was recently sold in a short sale and rehabilitated by the two.

When a bank forecloses on a house, the property can languish for months, either vacant or occupied by a former owner who no longer spends money on maintenance.

Short sales — selling the property for less than the debt owed — can allow both parties to avoid foreclosures. These transactions can also help to keep the house from falling into disrepair.

"These properties are slowly just decaying and lingering — dying on the vine so to speak — because they're stuck in that pre- or post-foreclosure limbo," said Russ Haims, a Worcester property owner and developer who renovates houses he acquires, often through short sales.

Mr. Haims, owner of Hampton Properties LLC, either sells the property afterward or rents out the units. He said he manages 20 locations, 17 of which he bought through short sales.

While there is no hard data on the number of short sales, lenders appear to be more willing to agree to this option, said Timothy M. Warren Jr., chief executive officer of The Warren Group, the Boston-based publisher of Banker & Tradesman.

"It sounds like maybe lenders are better prepared to make quicker decisions and more likely to compromise," Mr. Warren said.

As home sales and median prices increase, lenders might want to seize the opportunity to unload distressed properties. And rising prices mean lenders can recoup more of their money, as the gap between home values and debt closes, he said.

"We try to act as an advocate for the homeowners that are facing financial issues or potentially foreclosures on the property," he said.

If a foreclosed house sits vacant for a period of time, people who don't belong there can move in, or thieves can steal the copper, said Mr. Rivard, whose management company also secures bank-owned properties in an attempt to prevent break-ins and property damage.

When a reputable buyer purchases a home through a short sale, the transaction helps preserve the housing supply in a way foreclosures don't, said Lisa Pepin, who sold a three-family house on Main Street in Worcester to Mr. Haims in December 2010, in a short-sale deal.

"Houses are meant to be lived in," said Ms. Pepin, who rents an apartment in the city. "Houses are not meant to be boarded up and left vacant."

She said Mr. Haims approached her in May 2010 about buying the house, which was built in 1852, after her student tenants moved out for the summer. She was worried about having no rental income until August.

Mr. Haims said he had often passed by the house and saw it was in poor condition. He purchased it for about $104,000, while about $140,000 of outstanding debt was forgiven, and he invested about $140,000 in the property, which he rents to graduate students, he said.

To attract possible sellers, Mr. Rivard said they place signs around the city offering cash for properties.

Homeowners must begin the short-sale process by submitting paperwork to lenders. Banks won't discuss the matter with potential buyers until the homeowner gives permission, according to Mr. Haims. He said he helps guide potential sellers through the process.

And it's a voluntary process, unlike a foreclosure auction, in which the owner has lost control of the property, he said.

"This is one (option) which until the very end requires all the seller's authorization, and it's all done voluntarily, because in the end, it's a sale that they sign the deed, as in any normal real estate transaction," Mr. Haims said.

Some homeowners facing foreclosure will resort to filing for bankruptcy protection, but this simply postpones a foreclosure auction. Short-sale submissions immediately halt foreclosure auctions until the sale is completed. And a homeowner does not have to be in default or foreclosure proceedings to qualify for a short sale, Mr. Haims said.

The owners benefit in a short sale transactions because the harm to their credit history is more limited when compared to a foreclosure. They can regain their creditworthiness in a few years, while it takes longer if they have gone through foreclosure, Mr. Haims said.

Local lenders are more receptive to short sales than national banks, Mr. Rivard said.

National lenders may worry that they don't know the local market well enough to be confident that they're getting a reasonable price, Mr. Warren said.

Some lenders are also reluctant to agree to short sales for the same reason they resist reducing the principal of a homeowner's mortgage, which is another alternative to foreclosures. They don't want to tempt homeowners to avoid their obligations, a possible risk known as "moral hazard," Mr. Warren said.

Still, there can be benefits for the lender to opt for a short sale.

"For the lender, it gets nonperforming loans off their books," Mr. Warren said.